Download what is the money supply?

3
3.1
3.2
3.3
Slide 1
MONEY AND
INTEREST
The Money Supply
Money Creation and Circulation
Interest and Interest Rates
Copyright South-Western, a division of Thomson, Inc.
Lesson 3.1
THE MONEY SUPPLY
GOALS
Define money supply, and explain how it
is measured
Describe two types of money, and explain
the fractional-reserve system
Slide 2
Copyright South-Western, a division of Thomson, Inc.
WHAT IS THE MONEY SUPPLY?
The money supply is defined as the liquid assets
held by banks and individuals.
The flow of money—and the amount of it
flowing—has a direct effect on how the economy
performs.
Slide 3
Copyright South-Western, a division of Thomson, Inc.
EXPANDING THE MONEY SUPPLY
Extra money in the economy can cause inflation
Demand for goods and services increase
Supply decreases, causing prices to rise
Slide 4
Copyright South-Western, a division of Thomson, Inc.
MEASURING THE MONEY
Liquidity is a measure of how quickly things may
be converted to something of value like cash.
Liquidity is variable, depending on the nature of
the asset or liability.
More Liquid
Change in your pocket
Slide 5
Less Liquid
Your savings account
A certificate of deposit
that matures next June
Copyright South-Western, a division of Thomson, Inc.
AGGREGATE MEASURES OF THE MONEY SUPPLY
M1
M2
M3
MZM
Slide 6
Money that can be spent immediately
All the money in M1 plus short-term
investments
All the money in M1 and M2 plus large
deposits
Money at zero maturity
Copyright South-Western, a division of Thomson, Inc.
THE NATURE OF MONEY
Two types of money
Commodity money is based on some item of value,
for example, gold or precious stones.
Fiat money is money that is deemed legal tender by
the government, and it is not based on or convertible
into a commodity.
The fractional-reserve system
Slide 7
Copyright South-Western, a division of Thomson, Inc.
Lesson 3.2
MONEY CREATION
AND CIRCULATION
GOALS
Describe how money is created by bank
activities
Explain how money circulates in the
United States
Slide 8
Copyright South-Western, a division of Thomson, Inc.
HOW MONEY IS CREATED
Printing currency and creating money are two
different things.
Money is actually created by the interaction of
the demand for it, banks’ use of it, and the
Federal Reserve’s supply and control of it.
Slide 9
Copyright South-Western, a division of Thomson, Inc.
DEPOSITS AND RESERVES
Primary reserves
Secondary reserves
Slide 10
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THE MULTIPLIER EFFECT
Money on deposit, minus the reserve
requirement, can be loaned to customers.
When it is, it creates new deposits, which also
go out to customers as loans and create more
deposits, thus expanding the amount of money
in the system.
Slide 11
Copyright South-Western, a division of Thomson, Inc.
HOW MONEY CIRCULATES
Transfers and circulation
The Fed and fiat money
Money as an IOU
Slide 12
Copyright South-Western, a division of Thomson, Inc.
Lesson 3.3
INTEREST AND
INTEREST RATES
GOALS
List factors that affect interest rates
Explain which factors the Federal Reserve
affects
Slide 13
Copyright South-Western, a division of Thomson, Inc.
INTEREST RATES AND BUSINESS
The money supply and the economy are linked
closely to interest rates.
Generally, when rates are high, money is said to
be “tight” and business tends to slow because it
costs more to acquire capital.
When rates drop, more credit is accessible, and
the economy tends to gather speed.
Slide 14
Copyright South-Western, a division of Thomson, Inc.
FACTORS AFFECTING INTEREST RATES
The federal funds rate is the amount of interest
charged for short-term, interbank loans.
The discount rate is the interest rate that the
Federal Reserve sets and charges for loans to
member banks.
The prime rate is the rate that banks charge their
best and most reliable customers.
Slide 15
Copyright South-Western, a division of Thomson, Inc.
MONETARY POLICY AND INTEREST RATES
The Federal Reserve sets the discount rate.
The Federal Reserve only influences the federal
funds rate.
Slide 16
Copyright South-Western, a division of Thomson, Inc.